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Iron ore hits the wall as 6% drop ends strong rally

A meeting between the leaders of the world's two biggest economies as well as rising geopolitical tensions were the biggest market movers in the week to April 7.

Concerns about a possible trade war caused nervousness among investors as U.S. President Donald Trump and his Chinese counterpart Xi Jinping came together for their first meeting in person. The two-day gathering had a relatively modest outcome, resulting in China lifting a ban on U.S. beef imports and promising easier access to financial sector investments. However, there was no update on a bilateral investment treaty, which Beijing and Washington had previously discussed under Barack Obama. The treaty would allow majority foreign ownership in Chinese securities and insurance companies, which is presently prohibited.

Rising political tensions, especially in Syria and Korea, weighed on markets as narratives between Russia and the U.S. sharpened in light of a U.S. air strike on a Syrian airbase. The event coincided with the Trump-Xi meeting, and gold prices actually edged lower that day even though investors were nervously eyeing the elevating political tensions.

At the end of the week, markets were widely disappointed by the headline number of the U.S. nonfarm payrolls report, which showed that 98,000 new jobs were created in March, falling short of consensus estimates of 180,000 jobs, even though earnings growth of 0.20% month over month was widely in line with expectations. The release prompted the U.S. dollar to drop before it made a quick recovery.

Minutes of the Federal Open Market Committee's March meeting previously indicated that the U.S. central bank could start reducing the size of its US$4.5 trillion balance sheet later this year. There were no significant changes in the Fed's monetary policy strategy, as "most participants anticipated that gradual increases in the federal funds rate would continue."

As far as metals are concerned, it was a mixed picture last week. The absence of Chinese buyers due to a public holiday made for a slow start to the week, even though there was a rebound when China's markets resumed trading on April 5.

In Europe, the European Commission confirmed anti-dumping import duties on hot-rolled flat steel products from China, setting duties of between 18.1% and 35.9% for five years.

Price ring

The move also hit iron ore prices, with bearish sentiment washing away the gains of previous weeks.

Iron ore spot fell sharply by 6.1% to a level of US$75.5 per tonne, meaning it is trading at a negative 4.3% in the year-to-date. Just two months ago, iron ore was trading at more than US$90 per tonne, but analysts have long been pointing to price correction. However, on a 12-months basis, iron ore is still up 37.9%.

Precious metals across the board ended the week with a slight gain. Gold was up 1.3% at US$1,266/oz, silver strengthened 0.5% to US$18.4/oz and platinum increased 1.7% to US$967/oz.

Most base metals also booked marginal gains, with copper and nickel nudging 0.2% and 0.6% higher to US$5,827 per tonne and US$10,019 per tonne, respectively, while lead and aluminium climbed 0.8% and 0.5%, respectively. Zinc finished the week in the red, down 1.8%.

Talking points

An analysis by Sanford C. Bernstein has identified copper and nickel as the commodities most challenged by political risk and margin performance from a supply-side perspective.

Using a model that calculates production risk-weighted scores, the research showed that political risk for copper and nickel has increased since 2006, while risk has declined for all other commodities, for some significantly.

"This deterioration has been driven by Chile, for the global copper industry, and by the Philippines and Indonesia for the global nickel industry," the team noted in an April 4 paper.

Copper and nickel are also the two most undervalued commodities on a margin basis, Bernstein concluded, both being the most pressured from a margin perspective versus historical averages.

Bernstein flagged the supply side for both materials as getting harder, adding that there is potential for the risk position to deteriorate further.

"It would surely be no shock to see the Chilean rating decline further in 2017 given the industrial action that we have seen in the country already this year, with strikes at Escondida and Cerro Verde, the largest and third-largest copper mines in the world respectively," Bernstein elaborated. "Likewise, it would also surely be no shock to see a further deterioration in the Investment Attractiveness score for Indonesia, which currently produces [about] 5% of global mined copper, given the policy issues that Freeport-McMoRan Inc. has been having with the Indonesian government."

Based on these observations, the team said it would "of course [...] be no shock" if the position of the global copper and nickel industries themselves continue to deteriorate.

"[This] emphasizes the need for greater discrimination in terms of portfolio risk management when constructing an optimized mining portfolio."


Major financing deals last week included a 10 billion Chinese yuan debt-to-equity swap that Anshan Iron & Steel Group Corp. signed with Industrial Bank. The Chinese government just relaunched the debt-for-equity scheme and Chinese banks are seeking to enter into deals with state-owned enterprises to ease their debt burdens.

Sibanye Gold Ltd. revealed plans to finance its US$2.2 billion acquisition of Stillwater Mining Co. through a US$1.3 billion rights offer and a US$1 billion bond. The US$1.3 billion rights offer is expected to conclude near the end of May, while the US$1 billion bond is expected to close at the latest in the third quarter.

Petra Diamonds Ltd. upped its offering of senior secured second-lien notes due 2022 to US$650 million, from US$600 million. The notes will accrue interest at 7.25% per annum, payable semiannually in arrears, and proceeds will be used to refinance existing US$300 million 8.25% senior secured second-lien notes due 2020, to repay drawn bank facilities and for general corporate purposes.

ArcelorMittal South Africa Ltd. plans to raise 3.5 billion South African rand through a borrowing-based facility as part of a capital raising plan. The company previously said it was looking to refurbish existing facilities in South Africa and that an environmental cleanup will need investment.

Executive exchange

Rupert Resources Ltd. named James Withall as its new CEO, effective April 18, replacing Brian Hinchcliffe who will move to the role of executive chairman. Withall was a managing partner at Baker Steel Capital Managers, where he was a gold sector specialist and the lead manager of the Baker Steel Precious Metals Fund.

Great Panther Silver Ltd. President and CEO Robert Archer announced that he will step down within the year. Archer will remain a member of the company's board and is helping to find a successor.

Sierra Metals Inc. appointed its board member Igor Gonzales to the role of president and CEO, effective May 1. Mark Brennan presently serves as the president and CEO of the company but handed in his resignation in late March.

Genius Properties Ltd. appointed Guy Goulet as president, CEO and as a director of the company, effective immediately, replacing interim CEO and President Jimmy Gravel.